HUGO BI LGRAM 




























Involuntary Idleness 


an 


EXPOSITION OP THE CAUSE OP THE DISCREPANCY 
EXISTING BETWEEN THE SUPPLY OP, 

AND THE DEMAND POR, 


LABOR AND ITS PRODUCTS. 


BY 

HUGO BILGRAM. 

i« 


PHILADELPHIA: 

J. B. LIPPINCOTT COMPANY. 
1889 . 

Hi 









Z 


* 


Copyright, 1889, by Hugo Bilgram. 


Transfer 

Engineers School Lfby. 
June 29; 1931 


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h'l'-f-r- IY> 1 Mt-P.s 






PREFACE. 


While engaged in the preparation of 
a treatise upon the subject of Social 
Rights and their relation to the distribu¬ 
tion of wealth, the author had an oppor¬ 
tunity to present some of the conclu¬ 
sions to which his studies have led at 
the meeting of the American Economic 
Association in Philadelphia, and on De¬ 
cember 29, 1888, read a paper on “ In¬ 
voluntary Idleness.” 

The Association having given but a 
brief abstract of the paper in the report 
of their proceedings, the author has been 
prevailed upon to publish the entire 
paper, and he is persuaded that its im- 



4 


PREFACE . 


portance as a contribution to economic 
thought will be recognized by such stu¬ 
dents as regard the modern presentation 
of the science of Political Economy to 
be in many respects entirely unsatis¬ 
factory* 


INTRODUCTION. 


In order that the reader may more 
readily follow the line of argument de¬ 
veloped in these pages, the following 
synopsis is presented. 

The aim of the treatise is to search 
for the cause of the lack of employment, 
which is obviously due to the observed 
fact that the supply of commodities and 
services exceeds the demand, although 
reason dictates that supply and demand 
in general should be precisely equal. 
The factor destroying this natural equa¬ 
tion is looked for among the conditions 
that regulate the distribution of wealth, 
— i.e.j its division into Rent, Interest, 
and Wages. 



6 


INTRODUCTION. 


The arguments evolved by the discus¬ 
sion of the Rent question, which of 
late has excited much public interest, 
being unable to account for the apparent 
surfeit of all kinds of raw materials, the 
topic of rent is eliminated by assuming 
all local advantages to be equal. 

At first an examination is made of 
the relation of capital to the productivity 
of labor, and that of interest on capital 
to the remuneration for labor, showing 
that high interest tends to reduce the 
productivity of, as well as the remunera¬ 
tion for, labor. Low wages being also 
concomitant with a scarcity of employ¬ 
ment, it is inferred that a close relation 
exists between the economic cause of in¬ 
voluntary idleness and the law of in¬ 
terest. 

Following this clue, the two separate 


INTRODUCTION. 


7 


meanings of the ambiguous word " Capi¬ 
tal” are compared, showing that money, 
which can never be used in the act of 
production, cannot be capital when that 
term is used in its concrete sense; and 
since capital is capable of producing a 
profit only when the same is used pro¬ 
ductively, the fact that interest is paid 
for money-loans, when that which is 
loaned cannot be used productively, 
must be traced to an independent cause. 
The usual argument that with money 
actual capital can be purchased is re¬ 
jected, because money and capital would 
not be interchangeable if their economic 
properties were not homogeneous. This 
compels the search for a property in¬ 
herent in money that can account for the 
willingness of borrowers to pay interest 
on money-loans. 


8 


INTRODUCTION. 


It is then shown that interest on 
money-loans is paid because money af¬ 
fords special advantages as a medium of 
exchange, and the value of this property 
of money is traced to its ultimate utility, 
or, in other words, to the increment of 
productivity which the last addendum to 
the volume of money affords by facili¬ 
tating the division of labor. 

Returning to the question of interest 
on actual capital,— i. e., the excess of 
value produced over the cost of produc¬ 
tion,—the question as to what deter¬ 
mines the value of a product leads to 
the assertion that capital-profit must be 
due to an advantage which the pro¬ 
ducer possesses over the marginal pro¬ 
ducer. This is found to be due to the 
interest payable by the marginal pro¬ 
ducer on money-loans. 


INTRODUCTION. 


9 


An ideal separation of the financial 
from the industrial world reveals a ten¬ 
dency of the industrial class to drift into 
bankruptcy by force of conditions over 
which they have no control. Those 
who are at the verge of bankruptcy 
being the marginal producers, others 
who are free of debt will reap a profit 
corresponding to the interest payable by 
the marginal producers on debts equal to 
the value of the capital they employ; 
hence the rate of capital-profit will tend 
to become equal to the rate of interest 
payable on money-loans, and the power 
of money to command interest, instead 
of being the result, is in reality the cause 
of capital-profit. 

The inability of the debtor class to 
meet their obligations increases the risk 
of business investments, and the accu- 


10 


INTRODUCTION. 


mulation of money in the hands of the 
financial class depriving the channels of 
commerce of the needed medium of ex¬ 
change, a stagnation of business will en¬ 
sue, which readily accounts for the accu¬ 
mulation of all kinds of products in the 
hands of the producers and for the con¬ 
sequent dearth of employment. The 
losses sustained by the lenders of money 
involve a separation of interest into two 
branches, risk-premium and interest 
proper, and considering that the risk 
premiums equal the sum total of all re¬ 
linquished debts, the law of interest is 
evolved by an analysis of the monetary 
circulation between the debtors and 
creditors. 

This analysis leads to the inference 
that an expansion of the volume of 
money, by extending the issue of credit- 


INTRODUCTION. \\ 

money, will prevent business stagnation 
and involuntary idleness. 

The objections usually urged against 
credit-money are considered and found 
untenable, the claim that interest natu¬ 
rally accrues to capital is disputed at each 
successive stand-point, and in the con¬ 
cluding remarks an explanation is given 
of the present excess of supply over the 
demand of commodities and services, con¬ 
firming the conclusion that the correction 
of this abnormal state is contingent 
upon the financial measure suggested. 




INVOLUNTARY IDLENESS. 


In studying the past as well as the 
present drift of popular thought on 
political and economic questions, there 
is found not only a striking divergence 
of opinions, but on every hand doc¬ 
trines are met that bear the unmis¬ 
takable stamp of anomalous reasoning. 

It is popular to attribute dull times 
and the consequent distress of the pro¬ 
ducers to an alleged overproduction of 
things, for the want of which people 
suffer. The immigration of those who 
are willing to add to our wealth by work 
and accept a small remuneration in re- 

2 13 



14 INVOL UNTAR Y IDLENESS, 

turn is considered detrimental to our 
well-being. The introduction of labor- 
saving machinery is contested by work¬ 
men in spite of the saving of time and 
labor. International commerce is con¬ 
sidered harmful to that country which 
receives more than it gives. 

But in whatever form these self-con¬ 
tradictions appear, they evidently arise 
from the existence of an ever-present 
fear that there is not enough work to do, 
and that enforced idleness may inflict its 
miseries upon those who in the struggle 
for existence fail to secure their share of 
the work. Yet our experience, which 
indicates that the supply of services as 
well as of commodities does exceed the 
effective demand for the same, is in 
direct conflict with rational thought. 
Whatever is offered in the market for 



INVOLUNTARY IDLENESS. 


15 


sale is ostensibly offered with the expec¬ 
tation of obtaining something else in re¬ 
turn, either directly or through the me¬ 
dium of exchange. Each supply of a 
commodity, each offer of a service, im¬ 
plies a demand for some other valuable 
thing or service. The more commodities 
one man makes and offers for sale or ex¬ 
change, the greater, it appears, should be 
the demand for other commodities. But 
while there is every reason to assume 
that the total supply of commodities and 
services in general should always equal 
the total demand, we notice in reality 
the absence of such an equation, we 
know that labor can become a drug in 
the market. The competition of those 
unemployed, who are in search of work, 
produce the long-recognized tendency of 
wages to a minimum of subsistence and 



16 


INVOL UNTAR Y IDLENESS. 


give plausible pretext to the doctrine of 
socialism. Tariff legislation, as well as 
that regulating immigration, the time of 
labor, etc., and other laws designed to 
regulate competition, testify in unmis¬ 
takable terms that the fear of compe¬ 
tition, the dread of involuntary idleness, 
is not an empty phantom, but a stern 
reality. Most painful is the effect of 
enforced idleness when it manifests 
itself in industrial depressions, those 
social calamities which the science of 
economics has so far failed to explain 
satisfactorily. 

The standard works on Political 
Economy, such as Ricardo’s, Mill’s, etc., 
fail to reveal the cause of the manifest 
discrepancy between what obviously 
should be and what really is. In fact, 
the method of those writers in dealing 



INVOL UNTAR Y IDLENESS. 1 7 

with definitions and propositions is in 
marked contrast with that adopted in the 
exact sciences. The use of ambiguous 
terms has led to unwarranted and incor¬ 
rect applications of otherwise correct 
doctrines. Well-established propositions 
being sometimes admitted and at other 
times unceremoniously ignored, contra¬ 
dictory statements are not infrequently 
found, which impair the reliability of 
the conclusions of those writers. But 
although they have in a measure failed 
to dispel the confusion of popular views, 
there is no reason why social phenomena 
should be more difficult to analyze than 
those of a physical or chemical nature. 
It should therefore be possible to find, by 
logical deduction, the fundamental cause 
of involuntary idleness, or the factor 
which destroys the natural equation be- 


2* 


18 


INVOLUNTARY IDLENESS. 


tween the supply of, and the demand 
for, commodities. And this can be 
found only among the conditions that 
regulate the distribution of wealth and 
determine its division into Rent, Inter¬ 
est, and Wages. 

The thorough ventilation which the 
relation of Rent to the Social Problem 
has received through the works of Ri¬ 
cardo and his followers, especially Henry 
George, while showing that a lowering 
of the margin of cultivation can account 
for a lowering of wages by a reduction 
of the productivity of labor, has brought 
forth no clear explanation for the excess of 
the supply of commodities and services. 
As long as there exists any uncultivated 
land capable of affording a living to 
its cultivator, the law of rent cannot ac¬ 
count for enforced idleness. The study 


INVOL UNTAR Y IDLENESS. 19 

of tlie economic causes which produce, as 
well as the laws which regulate, capital- 
profit, or interest proper, have in the in¬ 
terim been comparatively neglected. It 
is therefore not inappropriate to give 
more thought to the relation which in¬ 
terest bears to wages. A rational anal¬ 
ysis requiring the exclusion of all matter 
foreign to this relation, the question of 
rent should be eliminated by assuming 
for the time being that all natural and 
local advantages were equal. 

While nature furnishes the substance 
of all wealth, labor and capital are the 
factors that give this substance value. 
The productivity of labor depends, how¬ 
ever, in a great measure upon the 
amount of capital employed. If some 
one, desiring to produce certain com¬ 
modities, could have the assistance of, 


20 IN VOL UNTAR Y IDLENESS. 

say, one hundred men, the productivity 
of their labor would be very low if no 
auxiliary capital were applied. The use 
of crude tools would decidedly increase 
the efficiency of their efforts, and if 
more capital in the form of improved 
auxiliaries were added, the productivity 
would be still greater. There is, how¬ 
ever, a limit to this increase of the prod¬ 
uctivity of a given number of men by 
the addition of cajfftal, because capital, 
when used productively, will deteriorate, 
and a portion of the labor must be di¬ 
verted for the purpose of restoring this 
loss. As the amount of labor so di¬ 
verted grows with the increase of capi¬ 
tal, it is evident that the productive 
power of labor will not keep pace with 
the addition of capital, and that a point 
can be reached beyond which a further 


INVOLUNTARY IDLENESS. 


21 

increase of capital will have an adverse 
effect and actually reduce the net prod¬ 
uctivity of those one hundred men. The 
variation of their productivity due to an 
increase of capital can he represented 
by a curve of the character shown in 
Fig. 1. (See plate at end of volume.) 

For reasons just stated this curve will 
decline after passing the apex M, which 
represents the highest possible produc¬ 
tivity of the stated amount of labor. 
The contingency of a future progress 
in the methods of production, which 
would affect the course of the curve, is 
of course not considered. 

Although the productivity is at a 
maximum when an amount of capital 
equal to OC is employed, the employer 
will not find it to his advantage to 
apply this amount, because of the in- 


22 INVOLUNTARY IDLENESS. 

terest-bearing power of capital. Letting 
the distance Cl represent the interest 
due to the capital OC, this amount 
must be deducted from the value pro¬ 
duced, leaving the value IM, from which 
the employer must defray the cost of 
labor, the remainder being his wages for 
the management of the business. By 
using an amount of capital equal to 
OC 7 , the interest would have amounted 
to C'i, and the return to labor and 
management, iP, would exceed the 
quantity IM. The most advantageous 
proportion of capital can be located in 
the diagram by finding that point, P, at 
which the curve is parallel to the in¬ 
terest-line 01, and it is the tact of 
successful business-men to closely ap¬ 
proach this point in their management. 
The point P bears the same relation to 


INVOLUNTARY IDLENESS. 23 

capital as the point of diminishing re¬ 
turns does to land. 

If the rate of interest payable on 
the capital OC had been CP, the high 
rate would have caused the employer 
to apply capital more sparingly, and 
our diagram would in fact indicate that 
the productivity C"P', due to the capi¬ 
tal OC", will give the best result. On 
the other hand, if the producers could 
have abundant capital without interest, 
labor would be employed most advan¬ 
tageously at its natural maximum of 
productivity. 

The diagram clearly illustrates the 
separation of the value produced by 
labor and capital into interest and 
wages, the remuneration of the man¬ 
ager being considered wages. But while 
so far we can see no indication as to 


24 INVOL UNTAR Y IDLENESS. 

what determines the rate of interest, it 
will be perceived that as interest rises 
wages become less, for the productivity 
of labor will be reduced by the more 
cautious use of capital, and, besides, a 
greater proportion of that which has 
been produced will go to capital as in¬ 
terest. The remuneration of all labor 
is represented by i'P' when interest is 
high, by iP when interest is low, and it 
would be equal to CM if capital could 
be obtained without interest. This prop¬ 
osition is true only for a state of persis¬ 
tency, when no secondary factors inter¬ 
vene, and not for transitory periods of 
industrial activity. If from any cause 
persistency is disturbed, the disturbing 
factor may for a time change this re¬ 
lation between wages and interest, and 
make wages and interest rise or fall 



INVOL UNTAR Y IDLENESS . 25 

simultaneously. We shall see that the 
cause of involuntary idleness is just 
such a factor. 

In comparing the proposition that 
under otherwise equal conditions a high 
rate of interest tends to reduce wages 
with the indisputable fact that when 
many men are without employment 
wages are low, a strong suspicion is 
raised that an intimate relation may 
exist between the economic cause of 
high interest and that of involuntary 
idleness; for there is no jfiienomenon 
which can have two independent ex¬ 
planations. We are therefore justified 
in pursuing the investigation by search¬ 
ing for the law that determines the rate 
of interest. 

This inquiry must be directed, not so 
much to the cause of the increase of 


26 IN VOL UNTA R Y IDLENESS. 

productivity attainable by the use of 
capital over that of productive efforts 
made without the use of auxiliaries, but 
to the economic causes that assign to 
the owner of capital a portion of that 
which is produced by the co-operation 
of capital and labor. 

In order to discriminate intelligently 
between the conflicting definitions of 
the term “Capital,” as given by the 
authorities, we should first understand 
why a distinction is made between 
wealth which is, and wealth which is 
not, capital. Experience shows that 
wealth under certain conditions is ca¬ 
pable of bringing a revenue to its 
owner, and this power fully justifies a 
classification being made. There being 
no other economic difference of impor¬ 
tance, it must be accepted as the real 


INVOL UNTAR Y IDLENESS. 27 

motive of this differentiation of wealth. 
Adam Smith defines the term by this 
power, and is followed by others, no¬ 
tably Macleod. There is, however, a 
strong tendency among modern writers 
to depart from this natural definition 
with a view of indicating the source of 
this power. According to John Stuart 
Mill capital is the accumulated produce 
of labor requisite for further produc¬ 
tion. The term “ Capital,” therefore, 
covers two totally distinct concepts, 
which are frequently confounded to the 
detriment of correct reasoning. Capital, 
in its abstract sense,—comprising all 
wealth capable of bringing a revenue, 
—admits the conception of a “ conver¬ 
sion of capital” or of “ floating capital,” 
etc., not referring to any particular 
thing, but to wealth in general when 


28 INVOLUNTARY IDLENESS. 

it has a certain economic relation to 
its owner, while in its concrete sense,— 
meaning certain things produced by 
labor, and used for certain purposes,— 
its conversion is inconceivable. Yet 
the adherents of the concrete definition 
adopt these phrases without even sus¬ 
pecting the logical error. Moreover, 
the concrete definition, if not further 
qualified, lacks the feature of exactness, 
in not stating whether wealth is capital 
whenever it is capable of being used 
productively, or only as long as it is 
in productive use. There is, however, 
no room for dissent. The mere ability 
of things to be used in production, if 
they are not so employed, cannot ac¬ 
count for the revenue-returning feature, 
which being the distinguishing attribute 
of capital, it is plain that not the po- 


INVOL UNTAR Y IDLENESS. 29 

tentiality of wealth, but its actual use 
alone can turn wealth into capital. 
Nor does this definition cover objects 
which are being consumed unproduc- 
tively, such as private residences rented 
to tenants, etc. A hired equipage is 
aiding farther production no more than 
a private carriage, yet in one case it is 
capital, in the other it is not. 

Another inconsistency is shown by 
the exponents of the concrete definition 
when they include money in the cate¬ 
gory of capital, while in reality money 
as such neither is nor can be used in 
the act of production, and therefore 
never can be a requisite for further 
production. This is admitted either di¬ 
rectly or by implication by most econ¬ 
omists. Newcomb asserts that “ the 
money serves the banker no useful 


3 * 


30 INVOL UNTAR Y IDLENESS. 

purpose until he passes it to some one 
else, perhaps a customer. Every one 
into whose hands it falls must be pay¬ 
ing or losing interest on it while he 
keeps it, and he cannot gain the inter¬ 
est until he purchases an ownership in 
some form of actual capital.” This is 
clearly an admission that interest must 
be paid or will be lost on money 
wherever it may be, or to whatever 
use it may be put; for even if actual 
capital is purchased, the loss of interest 
must be borne by the one to whom 
the money is transferred. Money being 
thus admitted to be unproductive, it 
cannot be considered capital if the defi¬ 
nition of Mill is adopted, and any prop¬ 
osition relating to capital and demon¬ 
strated under this definition cannot be 
consistently applied to money. It is 


INVOLUNTARY IDLENESS. 31 

therefore important to pay special at¬ 
tention to the interest-bearing power of 
money, the real source of which is not 
generally recognized. 

In the following discussion the term 
capital will be used in its concrete 
sense. 

The income derived from wealth, 
whatever be its form, can be acquired 
by its owner in two ways. He may 
use the wealth productively, or, by 
loaning it to others, receive a premium 
for its use. In the one case the income 
accrues as profit, consisting of the ex¬ 
cess of value obtained over and above 
the market value of the labor applied 
and other expenses incurred; in the 
other case it appears as interest proper, 
which is equal to the gross interest 
minus the rate of risk and deteriora- 


32 INVOLUNTARY IDLENESS. 

tion. But since he who borrows capi¬ 
tal is willing to give interest because 
the use of capital will give him a ma¬ 
terial advantage, it follows that profits 
derived from loans must be considered 
mere transfers of the value of this ad¬ 
vantage. 

Applying this proposition to the in¬ 
terest-bearing power of money, we are 
confronted with the fact that money 
cannot be utilized as a requisite of pro¬ 
duction, and is therefore incapable of 
bringing an excess of value in this re¬ 
spect. Consequently we are obliged to 
look elsewhere for any benefit which 
may be derived from its use. It is true, 
we are told that with money actual 
capital can be purchased from which 
profit may be obtained. John Stuart 
Mill says, “ Money, which is so com- 


INVOLUNTARY IDLENESS. 33 

monly understood as the synonyme of 
wealth, is more especially the term in 
use to denote it when it is the subject of 
borrowing. When one person lends to 
another, as well as when he pays wages 
or rent to another, what he transfers is 
not the mere money, but a right to a 
certain value of the produce of the 
country to be selected at pleasure, the 
lender having first bought this right by 
giving for it a portion of his capital . 
What he really lends is so much capital ; 
the money is the mere instrument of 
transfer.” 

In this proposition it is assumed that 
money is not necessarily wealth, but a 
right to a certain amount of wealth, and 
that the lender of money has received 
his money by giving a portion of his 
capital for that which is merely an evi- 


34 INVOLUNTARY IDLENESS. 

dence of such surrender of capital 
coupled with the right to demand an 
equivalent at pleasure. This right is 
what is transferred to the borrower, who 
can use the capital so obtainable, and for 
this use pays interest. To an unpreju¬ 
diced mind several pertinent questions 
will naturally arise. If society has ob¬ 
tained capital for which it has given 
merely a right to demand an equivalent, 
why does not society pay for the use of 
that capital, indemnifying the holder of 
money for his abstinence, until that right 
to demand has been redeemed ? If Mill's 
reasoning is correct, somebody must have 
the lender's capital even before he lends 
the money to others, and justice would 
require that the interest gained by its 
use should be paid to the holder of money 
by the user of that capital. Moreover, 


INVOLUNTARY IDLENESS. 35 

why is it that the borrower of money 
must pay interest for the mere right to 
select capital before the selection is made ? 
During the interval between the borrow¬ 
ing of money and the selection of capital 
society has the use of that capital, and 
society rather than the borrower of 
money should in equity bear the burden 
of interest. Furthermore, why should 
the borrower of money pay the interest 
to the lender who has given his actual 
capital to somebody else, instead of pay¬ 
ing it to him who renders the service of 
giving actual capital for a mere evidence 
of surrender and right to demand an 
equivalent ? 

If capital has reproductive powers 
while money has not, it is not reasonable 
to assume that anybody would willingly 
exchange actual, profit-bearing capital 


36 INVOL UNTAR Y IDLENESS . 

for money, on which interest will be lost, 
if money should not afford some other 
equivalent advantage, and notwithstand¬ 
ing the assertions of authorities we must 
look for a property inherent in money 
which alone can account for the willing¬ 
ness of borrowers to pay interest to the 
lender of money. 

As regards concrete capital,— i.e. } prod¬ 
ucts of labor applied to further produc¬ 
tion, there can be no doubt that profits 
can originate only while it is used in 
combination with labor. Capital profits 
will therefore invariably appean in con¬ 
junction with wages, in the manner shown 
in the diagram Fig. 1. (See plate at 
end of volume.) The term production 
must here of course be understood in 
its broad sense. Goods exposed for sale, 
aggregated with others of a similar 


INVOLUNTARY IDLENESS. 


37 


nature, though apparently out of use, 
are really in the stage of commercial 
production, the process of distribution 
requiring them to remain, for a time, 
in a seemingly inert state. Industrial 
capital may also be temporarily out of 
use without ceasing to be capital as this 
term is commonly accepted. Machines 
are usually idle not only fourteen hours 
each day but also one day of each week. 

But the requisites of production may 
be out of use for quite other reasons. 
To be productively employed they must 
be aggregated in certain combinations. 
A power-loom, for instance, can be in 
industrial use only when located in a 
suitable building, when connected by 
shafting and belting with a motor, when 
supplied with yarns to be woven into a 
fabric, and when attended by a mechanic 


38 INVOLUNTARY IDLENESS. 

skilled in the art of weaving. Each of 
the numerous branches into which pro¬ 
duction is divided requires a peculiar 
combination of raw materials, auxiliaries, 
and human skill. Any product passing 
through the various processes in the 
course of its economic maturation be¬ 
comes alternately a raw and a finished 
product, the finished product of one 
group of producers being the raw ma¬ 
terial of those that follow. 

Regarding a single group, the wealth 
in course of generation, after passing 
through the process peculiar ' to that 
group, becomes a finished product, ceasing 
to be a requisite of production to this 
group, and is to all intents and purposes 
inert wealth or idle capital. In this 
form it is virtually no-interest capital, 
and has the same function in the theory 


INVOLUNTARY IDLENESS. 


39 

of capital-interest that no-rent land has 
in the theory of rent. It can be vivi¬ 
fied or converted into live capital only 
if transferred to another group, in which 
it will find that combination of capital 
and skilled labor congenial to its farther 
maturation. 

But in the present quasi-individual- 
istic state of society such transfers are 
always contingent upon the return of 
equivalents. These exchanges would be 
beset by serious obstacles, practically for¬ 
bidding a division of labor, if the special 
instrument of exchange, money, were un¬ 
known, which though not a means of 
production, is a very essential factor in 
our industrial system. Without it those 
transfers which convert inert wealth into 
active capital and render possible a divi¬ 
sion of labor would be almost impossible. 


40 INVOL UNTAR Y IDLENESS. 

This will explain why an owner of 
actual capital is willing to exchange it 
for money on which he will lose interest 
while possessing it. The capital he is 
willing to give for money has manifestly 
arrived at that stage of production when 
it is to him a finished product and re¬ 
quires to be transferred to other pro¬ 
ducers to become live capital, while he 
in turn requires capital which is inert to 
others but capable of further productive 
manipulation by him. To accomplish 
these transfers, money is the indispen¬ 
sable instrument. One of the most im¬ 
portant phases of this function is the 
paying of wages,— 4.e., the distribution, 
among the producers, of the increment 
of value which accrues to all products 
as they pass through the various stages 
of production. 


INVOLUNTARY IDLENESS. 44 

This analysis leads to the inference 
that interest on money-loans is paid be¬ 
cause money affords special advantages as 
a medium of exchange , and the fact that 
most money transactions of to-day are 
made by means of paper evidences with¬ 
out transfer of actual wealth confirms 
this conclusion. A loan of bank-notes 
on security is admittedly an exchange of 
two rights of action,—one, the security, 
having a precarious, the other, the 
money, having an ever-ready value. 
The right of action which the banker 
accepts as security can be exchanged for 
other things, or realized, only on certain 
conditions, while that which he gives is 
readily accepted everywhere at its face 
value. This universal acceptability gives 
to money its special advantage, and 
being the only important difference be- 


42 INVOL UNTAR Y IDLENESS. 

tween the two rights of action, the pay¬ 
ment of interest can be traced to no 
other feature of money. 

We can now proceed to investigate the 
value of this advantage and its relation 
to the rate of interest. In a community 
in which, for the want of money, barter 
is the sole method of exchange, an ex¬ 
tensive division of labor with its attend¬ 
ing advantages would be impossible. A 
limited supply of money can only par¬ 
tially improve this condition, but it 
would naturally flow into those channels 
in which the resulting advantages are 
greatest. A second equal supply, while 
likewise augmenting productivity by per¬ 
mitting a further division of labor, would 
not increase it in the same measure, the 
channels of the first order being filled. 
A third equal supply would further in- 


INVOLUNTARY IDLENESS. 43 

crease productivity, but in a still less 
degree. The general advantage afforded 
by money can therefore be represented by 
a curve, as shown in Fig. 2 (see plate at 
end of volume), the ordinates represent¬ 
ing the increase of annual productivity 
contingent upon the corresponding in¬ 
crement of the volume of money repre¬ 
sented by the abscissae, each new addi¬ 
tion corresponding with a diminishing 
advantage. 

Now, although the successive additions 
to the volume of money produce different 
effects as far as the general good is con¬ 
cerned, the law of supply and demand 
will tend to accord to all money in the 
same market an equal rate of interest, 
and it can be demonstrated that this rate 
will adjust itself to the ultimate utility 
of money, namely, the annual increase 


44 INVOL UNTAR Y IDLENESS. 

of productivity, Ya, afforded by the last 
addendum, dV, of the total volume of 
money, OV. For if the owner of this 
last quantity of money expected a higher 
rate, he would find all channels capable of 
rendering such a rate fully supplied, and 
must therefore be content with the advan¬ 
tage of the best channel yet open. He 
being the lowest bidder, this obviously 
determines the market rate of interest, 
as indicated by the horizontal line ca. 

The diagram now plainly shows the 
separation of the total benefit derived 
from the division of labor attainable by 
the use of the volume of money OV, 
and represented by the area OcbaV, into 
two parts; the oblong OcaV incloses that 
part which the law of supply and de¬ 
mand will apportion to money as interest, 
while the remainder, the area cba, will 


INVOLUNTARY IDLENESS. 45 

accrue to capital and labor. The dia¬ 
gram also appears to indicate that the 
rate of interest on money-loans, other 
things being equal, will depend on the 
volume of money in circulation, when¬ 
ever the law of supply and demand is 
free to operate. 

The inquiry as to the economic cause 
of the profit which accrues to wealth 
used productively can now be continued. 
Such profit can arise only if the value 
created by the combination of capital 
and labor exceeds the cost of labor; that 
is, if the value produced exceeds the 
cost of production, this cost including 
the value of the labor of the employer. 
Here the question naturally arises, 
What determines the market value of 
that which is produced^ and when and 
why does it exceed the cost of production ? 


46 INVOL UNTAR Y IDLENESS . 

In answer we must refer to the law of 
supply and demand, the effect of which 
is thus definitely expressed by Ricardo: 
“The exchangeable value of all com¬ 
modities, whether they be manufactured, 
or the produce of the mine, or the 
produce of land, is always regulated 
not by the less quantity of labor that 
will suffice for their production under 
circumstances highly favorable and ex¬ 
clusively enjoyed by those who have 
peculiar facilities of production, but by 
the greater quantity of labor necessarily 
bestowed on their production by those 
who have no such facilities; by those 
who continue to produce them under 
the most favorable circumstances; mean¬ 
ing, by the most unfavorable circum¬ 
stances, the most unfavorable under 
which the quantity of produce required 


INVOLUNTARY IDLENESS ,. 47 

renders it necessary to carry on the pro¬ 
duction.” 

Ricardo has evidently in mind those 
things which are produced under dif¬ 
ferent degrees of difficulty, the quantity 
produced under the most favorable con¬ 
ditions being inadequate to supply the 
demand. The total demand determining 
the margin of the least favorable point 
at which production will be continued, 
Ricardo’s law of value can be briefly 
stated as follows: The natural value of 
those things that are being reproduced is 
always equal to their cost of production 
at the margin of production. Conced¬ 
ing this proposition, it follows that every 
profit must be traceable to an advantage 
which its recipient possesses over the mar¬ 
ginal producer , and, moreover, that no 
persistent profit can possibly arise unless 


48 INVOL UNTAR Y IDLENESS. 

there be a difference in the opportunities 
of production. In continuing our in¬ 
quiry we must look for such a difference. 

It would be an error to bring into 
consideration the difference of abilities 
of employers. The so-called profits of 
the enterprising business manager are, as 
a rule, a remuneration for valuable ser¬ 
vices rendered, and properly belong to 
the category of wages. Our object is to 
find the economic cause which appor¬ 
tions a share of the produce to capital 
independent of its owner’s ability or 
assistance as a worker or manager. There 
is but one class of variable producer’s 
expenses having the character of a dis¬ 
advantage that has any direct connection 
with our subject. Those who do not 
own all the capital they are using must 
pay interest on their indebtedness, which 


INVOLUNTARY IDLENESS. 49 

increases their actual outlay over that of 
business-men free of debt. The question 
is now, should this outlay be considered 
an unavoidable addition of the cost at 
the margin. If it were paid because of 
the profit-bringing power of the bor¬ 
rowed capital, then the solution of the 
problem would be as remote as ever. 
But if there be some other economic 
factor compelling this outlay, its exami¬ 
nation may reveal that which we are in 
search of. 

Business debts are, as a rule, contracted 
not by borrowing actual capital, but by 
borrowing money, and, as we have seen 
that money bears interest solely on ac¬ 
count of its attribute as a medium of 
exchange, and have taken issue with the 
prevailing impression that the borrowing 
of money is a borrowing of capital, we 


50 INVOL UNTAR Y IDLENESS. 

must searcli for the reason why business¬ 
men so largely depend upon loans to 
procure the medium of exchange. 

Were it possible to separate by a 
sharp line the financial from the in¬ 
dustrial world, those who issue and those 
who loan money from those who pro¬ 
duce wealth, the flow of money between 
these two groups would present a very 
striking feature. The industrial group 
could obtain the medium of exchange 
requisite to carry on commerce in but 
two ways; by selling the products of 
their labor to the financial group, and by 
borrowing money from them. By the 
first measure the transfer of money from 
one to the other group is absolute, by 
the second it is conditional upon a return 
of the principal with the addition of in¬ 
terest . Loans, as a rule, imply a return 


INVOLUNTARY IDLENESS. 51 

of a greater sum of money than was 
loaned, and the only persistent source 
from which this excess can be drawn is 
obviously the first mentioned way of 
obtaining money. These receipts from 
sales are, however, not so much regulated 
by the productivity of the debtors as by 
the willingness of the creditors to buy 
that which the debtors offer for sale. 
And since money loaned to others is a 
source of income, it is quite natural that 
the creditors will not only reinvest the 
principal, but will reserve a part of that 
which they receive as interest for addi¬ 
tional investments. Hence only a por¬ 
tion of the money which the debtor class 
pays as interest to the creditors will 
return to them by the regular channels 
of commerce, and the receipts of money, 
by the industrial group, from sales to the 


52 


INVOLUNTARY IDLENESS. 


financial group being for this reason less 
than the amount of interest paid, the 
primary effect will be a reduction of the 
money circulating among the producers. 
Some of the channels of commerce, that 
were previously filled with the requisite 
medium of exchange, having been thus 
depleted, the members of the industrial 
group will be induced to borrow not only 
that money which had been returned as 
principal, but also that which the finan¬ 
ciers had reserved for additional invest¬ 
ments. This measure will increase both 
the indebtedness and the obligation to 
pay interest, augmenting the discrepancy 
between the amount of money received 
through sales and that expended to pay 
interest, the growth of indebtedness as¬ 
suming more or less the nature of a 
geometrical progression. This cannot 


INVOL UNTAR Y IDLENESS. 53 

continue forever. It not only becomes a 
physical impossibility for the debtors, as 
a class, to ever satisfy their creditors, 
but they are irresistibly driven, by the 
fatality of these conditions, into bank¬ 
ruptcy. 

These conditions do in reality exist in 
our present social system. Even though 
the distinction between the financiers 
and the producers is not as sharp as 
outlined in the above analysis, the prem¬ 
ises are, notwithstanding, amply jus¬ 
tified. By virtue of our financial laws, 
which forbid the issuer of bank-notes to 
use them for industrial purposes, this 
money can be brought into circulation 
only by the creation of a debtor class, 
which is necessarily recruited from the 
industrial group. It is true, the press¬ 
ure, which we have seen will inevitably 


5* 


54 INVOLUNTARY IDLENESS. 

result, will not fall with equal severity 
upon all men engaged in production. 
Many will keep out of debt, while others 
will succeed in freeing themselves from 
that burden. But since interest must 
be paid in money , and the debtors as a 
class cannot indefinitely pay more than 
the amount they realize from sales to 
the creditors,—these sales being inade¬ 
quate to restore to the debtors the means 
of paying the interest, owing to the fact 
that the creditors apply a portion of 
their income to additional investments,— 
the inability to pay must result in the 
failure of the less successful of the pro¬ 
ducers despite their industry and intel¬ 
ligence, not for the lack of business 
capacity, but because their competitors 
are abler than they. They will continue 
to produce until their debts exceed the 



INVOL UNTAR Y IDLENESS. 55 

value of their capital, when, being driven 
beyond the margin of successful compe¬ 
tition, they must succumb to the inevi¬ 
table. We here recognize a condition 
which inexorably forces upon the pro¬ 
ducers an ever-increasing indebtedness 
and obligation to pay interest, precipi¬ 
tating one after another into insolvency. 
Those who are at the verge of bank¬ 
ruptcy, being indebted to an amount 
equal to the value of the capital they 
employ, are obviously the marginal pro¬ 
ducers, and as the natural value of the 
products will equal the cost of produc¬ 
tion to them, all producers whose capital 
is unencumbered will obtain a profit 
equal to the interest payable on borrowed 
money by those marginal producers. 

This course of reasoning would indi¬ 
cate that, quite contrary to the generally 


56 INVOL UNTA R Y IDLENESS. 

received doctrine, the power of money 
to command an interest is not the result , 
but the cause of capital-profit. 

This is, however, not the only impor¬ 
tant conclusion to which this analysis 
leads. The logical results of the con¬ 
ditions depicted agree so fully with all 
the phenomena common to business de¬ 
pressions, that no more complete verifi¬ 
cation of the theory can be desired. As 
the indebtedness of the producers grows 
with an ever-increasing rapidity, they 
cannot indefinitely continue to contract 
new loans. Money will accumulate in 
the hands of the financial class instead 
of circulating in the channels of com¬ 
merce. The inability of the producers 
to meet their obligations will become 
general, investments will become haz¬ 
ardous, and a portion of the interest must 


INVOLUNTARY IDLENESS. 57 

be devoted to cover the occasional losses 
of the creditors, the remainder alone 
being a real source of income. Interest 
will thereby be separated into two parts, 
the risk premium , or insurance to bal¬ 
ance the deficiency of the principal re¬ 
turned on loans, and the interest proper . 
The law of supply and demand no longer 
dominates in fixing the rate of interest. 
Its operation is impeded by the inability 
of the debtor class to return more money 
than they receive. The determination 
of the rate of interest proper must there¬ 
fore be relegated to another law, born 
of the same conditions that produce the 
deplorable results so characteristic of our 
present industrial development. The 
constant drain upon the money in circu¬ 
lation paralyzes commerce and obstructs 
the division of labor. Products in vari- 


58 


INVOLUNTARY IDLENESS. 


ous stages of completion accumulate in 
the hands of the producers who cannot 
transfer them for further productive 
manipulation. The means of production 
are lying idle and workmen skilled in 
special trades cannot find employment. 
The financiers, in whose hands the money 
accumulates, are anxious to loan it at 
low interest on good security, hut the 
general stagnation of business renders 
all investments insecure or unprofitable. 
Thus we find a ready explanation of the 
phenomena of business depression, and 
can discard such insufficient and illogical 
though popular explanations as a general 
loss of mutual confidence, speculation, 
accidental coincidence of unsuccessful 
enterprises, excessive railroad construc¬ 
tion, over-production, keen competition, 
strikes, etc. All these alleged causes 


INVOL UNTAR Y IDLENESS. 59 

are in reality merely symptoms of the 
same social disorder. 

For the analytical deduction of the 
Law of Interest see Appendix. 

When by purely deductive reasoning 
we arrive at conclusions so completely 
corresponding with experience, it is 
reasonable to accept their promptings 
as to the proper method of avoiding 
industrial stagnation, which our investi¬ 
gation has shown to be engendered by 
an insufficient supply of money. We 
are naturally led to ask, What limits 
the volume of money? Before the de¬ 
velopment of the modern banking sys¬ 
tem, when the precious metals were the 
almost exclusive money-medium, the 
volume of money could not exceed the 
amount of those metals. But since the 
use of credit as a medium of exchange 


00 INVOL UNTAR Y IDLENESS. 

has been established, the extent to which 
the money-volume can be increased is 
almost unbounded, encompassing the en¬ 
tire credit of the business world, which 
is undoubtedly the natural limit. Our 
financial laws, however, by strictly cir¬ 
cumscribing the emission of credit-money, 
impose an artificial barrier, the removal 
of which would put an end to the invol¬ 
untary idleness which the onerous toll 
for the use of money occasions. But 
since an issue of money, limited only 
by the effective credit, would be a radical 
departure from our present system, it is 
proper to examine the principal objec¬ 
tions urged against it,—the ease with 
which it can be abused, and its effect 
upon the purchasing power of money. 

The first of these objections is not 
justified, since the abolition of an arbi- 


INVOL UNTAR Y IDLENESS. 01 

trary limitation need not involve the 
withdrawal of the ordinary safeguards 
that restrain the unscrupulous. To pre¬ 
vent fraud and imposition the govern¬ 
ment has been invested with the power 
to furnish money, guaranteeing its value, 
and controlling its issue. But restric¬ 
tions are made that are not in harmony 
with this reason for confining the regula¬ 
tion of credit money to the government, 
and they are primarily responsible for 
the scarcity of money and its conse¬ 
quences. The unlimited issue, by the 
government, of credit money to those 
furnishing proper security, precisely as 
it now loans notes to the national banks, 
with this difference, that not only 
national bonds, but any adequate security 
be acceptable, while removing the arbi¬ 
trary limit, would in no wise facilitate 


02 INVOL UNTAR Y IDLENESS. 

abuse. The risk involved in accepting 
securities other than bonds could be met 
by a charge of interest sufficient to 
cover these losses, the rate of such risk 
being readily ascertained. In the ab¬ 
sence of an arbitrary limit the volume 
of money would be free to expand in 
proportion to the effective demand, and 
the rate of interest being reduced to the 
rate of risk only, interest proper for the 
use of money would cease. 

To be sure, capital as well as money 
when loaned will continue to bring a 
return, but the law of supply and demand 
operating without artificial restriction, 
the pay for the loan of capital will 
naturally adjust itself to the economic 
value of its use,— i.e., the rate of risk and 
the deterioration of the capital loaned. 
Only the apparent power of capital to 


INVOLUNTARY IDLENESS. 


63 


more than reproduce itself, the ability 
to bring a persistent revenue, will ter¬ 
minate. 

The removal of the artificial impedi¬ 
ment to the free conversion of sound 
credit into money would have a vital 
bearing upon the Kent question which is 
now exciting considerable interest in 
economic circles. A reduction of the 
current rate of interest is known to have 
the effect of raising land values, and if 
the rate of interest proper were reduced 
to zero, land values would obviously rise 
until the taxes, if assessed pro rata on 
the value of real estate, will practically 
absorb all of the economic rent. The 
nationalization of the economic advan¬ 
tages of natural and local opportunities 
would therefore result without any fur¬ 
ther legislation on the subject. 


64 INVOLUNTARY IDLENESS. 

The second objection, founded upon 
the assertion that the purchasing power 
of money is always inversely propor¬ 
tional to the total volume, other things 
being equal, is widely accepted as con¬ 
clusive. Were it true that an increase 
of the volume of money would be bal¬ 
anced by a reduction of the value of each 
dollar, the capacity of the total amount 
of money to perform its function would 
remain unchanged, and under such cir¬ 
cumstances the measure suggested would 
obviously be futile. 

This theory of the value of money, 
though disputed by some economists, is 
vigorously defended by most English 
and American writers. Ricardo asserts: 
“ That commodities would rise or fall in 
price, in proportion to the increase or 
diminution of money, I assume as a fact 


INVOL UNTAR Y IDLENESS. 05 

which is incontrovertible.” Yet the 
strongest arguments that can be adduced 
against this position are found in this 
writer’s works. He unqualifiedly de¬ 
clares that the value of any article 
capable of reproduction is equal to the 
highest cost at which its production is 
continued, the cost at the margin of pro¬ 
duction. It is therefore remarkable that 
in the quotation referred to this law of 
value, which has been so properly ap¬ 
plied in the theory of rent, has been 
totally ignored, especially since he ad¬ 
mits that, “ While the state coins money, 
and charges no seignorage, money will 
be of the same value as any other piece 
of the same metal of equal weight and 
fineness; but if the state charges a 
seignorage for coinage, the coined piece 
of money will generally exceed the value 


00 INVOL UNTAR Y IDLENESS. 

of the uncoined piece of metal by the 
whole seignorage charged.” Here it 
is plainly acknowledged that the value 
of money equals its cost of produc¬ 
tion. Now, if this proposition is true, 
the value of money can rise or fall, or 
prices in general can fall or rise, only if 
the cost of producing money is changed, 
and the volume of money already in 
circulation cannot influence this value. 
If, on the other hand, the quantity of 
money in circulation determines the 
value of money, this value, in conse¬ 
quence, would be independent of the 
cost of production. Obviously one of 
the two Ricardian propositions must be 
wrong. 

John Stuart Mill follows Ricardo 
very closely. In two consecutive chapters 
he expounds both propositions, and at- 


INVOLUNTARY IDLENESS. 07 

tempts to harmonize them by referring 
to a particular illustration in which the 
contradiction does not present itself 
plainly. Other inconsistencies are dis¬ 
posed of in an equally remarkable 
manner. After showing that money is 
merely a contrivance for facilitating ex¬ 
changes, the mode of exchanging things 
for one another consisting in first ex¬ 
changing a thing for money and then 
exchanging the money for something 
else, he asserts that “ The value or pur¬ 
chasing power of money depends, in the 
first instance, on demand and supply. 
. . . The supply of money . . . is all 
the money in circulation at the time. 

. . . As the whole of the goods in the 
market compose the demand for money, 
so the whole-of the money constitutes 
the demand for goods. The money and 


08 INVOLUNTARY IDLENESS. 

the goods are seeking each other for the 
purpose of being exchanged. It is in¬ 
different whether, in characterizing the 
phenomena, we speak of the demand 
and supply of goods, or the supply and 
the demand of money. They are equiv¬ 
alent expressions/’ 

This proposition leads to a very re¬ 
markable inference. Conceding that 
the seller of things wants money only 
for getting other things, then the de¬ 
mand for money is virtually a demand 
for those other things; and since the 
supply of goods and the demand for 
money are “ equivalent expressions,” and 
the demand for money really means a 
demand for goods, it must logically follow 
that the value of all money must equal 
the value of all goods offered for sale. 
This conclusion is obviously at variance 



INVOLUNTARY IDLENESS. 09 

with facts. It is true, in the same 
chapter this very inference is repudiated, 
but this involves a qualification which 
reflects disastrously upon the original 
proposition. The logic of a writer can 
fairly be questioned who propounds a 
doctrine, repudiates one of its corollaries, 
and then finds fault with others for re¬ 
fusing to accept this proposition as in¬ 
controvertible. 

Professor Newcomb attempts to show 
by the equation existing between the in¬ 
dustrial or societary and the monetary 
flow that prices in general must rise or 
fall as the volume of money is increased 
or reduced, but the fact appears to have 
escaped his attention that a restriction 
of the money-volume necessarily reacts 
upon the corresponding industrial flow, 
which renders untenable his conclusion 


70 INVOL UNTAR Y IDLENESS. 

based on a constant industrial flow. It 
is the amount of societary circulation 
and eventually the rapidity of circula¬ 
tion, and not the value of the dollar, that 
will respond to a change of the volume 
of money. His equation, properly in¬ 
terpreted, proves conclusively that the 
limitation of the volume of money, in 
being attended by a restriction of the 
monetary flow, must react unfavorably 
upon the industrial flow and consequently 
produce business stagnation. 

The opinion that the value of money 
bears an inverse ratio to its volume 
originates from a misconception of the 
nature of credit-money, resting on the 
absurd belief that value can be created 
or changed by the fiat of the government. 
Even though the followers of Eicardo 
contest this view, they inadvertently 


IN VOL UNTAR Y IDLENESS. 7 \ 

commit themselves to it in their doctrine 
of the value of the so-called inconver¬ 
tible notes. They aver that such notes, 
when brought into circulation while coin 
is yet in use, in driving the coin out of 
circulation assume a value equal to that 
of the precious metals thus displaced. 
This would obviously imply that the 
issue of such notes does increase the 
wealth of a country. 

There is but one rational theory of 
credit-money. The note is merely an 
evidence that the bearer has a right of 
action against the issuer,—in other words, 
a qualified right of ownership to wealth 
held by the issuer of the note,—and its 
current value equals the amount of 
wealth or services obtainable, or sup¬ 
posed to be obtainable, for this evidence 
from the issuer. The value must of 


72 INVOL UN1AR Y IDLENESS. 

course be specified by reference to a 
value unit,—usually a definite weight 
of silver or gold,—in which the notes 
must be conditionally redeemable, but 
not necessarily on demand, and a de¬ 
preciation from this nominal value can 
occur only if the issuer fails to fulfil 
his promise and the holders of the 
notes are unable to compel such ful¬ 
filment. As regards their value, bank¬ 
notes as well as the so-called inconvert¬ 
ible notes are essentially analogous to 
mortgages, promissory notes, and other 
evidences of indebtedness, and any at¬ 
tempt to apply the volume doctrine to 
the value of the latter would properly be 
condemned as a fallacy. Why, then, 
should it be true if applied to credit- 
money? If a bank-note is a receipt, 
showing that the holder has surrendered 


INVOLUNTARY IDLENESS. 73 

some value, it must also specify recip¬ 
rocally as to who has received this value, 
and will return it when the note is re¬ 
tired. The members of society sever¬ 
ally can surely not be held responsible 
for what one person has given to an¬ 
other ; they will therefore not accept a 
note unless they have the assurance that 
the issuer, who is the first recipient of 
value for the mere paper evidence, will 
ultimately redeem the note by giving 
the specified value for it. The so-called 
inconvertible notes contain the promise 
of redemption by implication only; and 
whenever the government accepts them 
in payment of taxes—that is, in ex¬ 
change for services rendered—this 
promise is fulfilled. But not being 
definitely expressed, governments have 
often taken advantage of this looseness 


74 INVOLUNTARY IDLENESS. 

of contract, and have violated what 
should have been a sacred obligation. 
Even now the opinion prevails that 
the excess of the nominal over the in¬ 
trinsic value of subsidiary coin is a 
legitimate “Profit” to the government, 
contrary to the dictates of honesty, which 
demand that this excess should be 
viewed as a temporary surrender of 
value by the bearer of the coin, to be 
returned when the coin is retired. Un¬ 
fortunately, it is not generally recognized 
that in money three factors are essen¬ 
tial : first, the token; second, wealth in 
the control of the issuer and obtainable, 
or supposed to be obtainable, in some 
form by the holder of the token; and, 
third, the general agreement which 
makes the token universally acceptable. 
In making the token of gold weighing 


INVOLUNTARY IDLENESS. 75 

25.8 grains per dollar, any further guar¬ 
antee is superfluous, but if only a por¬ 
tion or none of the value accompanies 
the token, the deficiency is supplemented 
by a right of action or its equivalent 
against the issuer. For this reason de¬ 
preciation cannot take place unless the 
holder of the token is unable to obtain 
the promised value from the issuer. 
Should the government furnish money- 
tokens to all those who give proper se¬ 
curity in the form of rights of action 
against their possessions, the property 
so involved would be the basis of the 
value of those notes, the government 
holding the rights of action to insure 
the ultimate redemption of the notes. 

It is frequently urged that the French 
assignats are an example of the evil 
effects of an expansion of credit-money, 



76 INVOL UNTAR Y IDLENESS. 

while in reality their depreciation must 
be attributed to a virtual absence of any 
specific right conferred by their posses¬ 
sion. While their value was alleged to 
be founded upon land, neither the 
amount of land nor its value was in 
any way defined upon the notes, and a 
statement of value or exchangeability 
having thus been omitted, their value 
was purely imaginary, and they could 
circulate only as long as there was a 
hope of an ultimate redemption. The 
United States greenbacks depreciated 
for no other reason than a partial re¬ 
pudiation, consisting in the refusal of 
the issuer to accept them for all debts 
at face value,— i.e ., 25.8 grains of gold 
per dollar. Manifestly, the idea that 
the volume of money has any effect 
whatever upon the purchasing power 


INVOLUNTARY IDLENESS. 


77 

of the dollar—except in the measure 
in which a change of the volume of 
coin may affect the demand for, and 
hence the commodity value of, gold— 
is a gigantic delusion, warranted neither 
by theory nor by facts, and the second 
objection to an extensive issue of credit- 
money falls to the ground. There re¬ 
mains no reason to fear any evil effects 
of an expansion of the money-volume 
while it remains within the bounds of 
substantial credit. 

But few words are needed to show 
how insufficient are the current the¬ 
ories that seek to account for the re¬ 
productive power of capital. There 
are really but two doctrines in vogue, 
the one ascribing interest to the in¬ 
creased efficiency of labor when sup¬ 
plemented by proper tools, the other 



78 INVOL UNTAR Y IDLENESS. 

claiming tliat men will not forego the 
present use of wealth without compen¬ 
sation for their temporary abstinence, 
and that this payment is necessary to 
induce people to make and save wealth 
to be used as capital. 

An illustration will enable us to ex¬ 
amine the correctness of the utility 
doctrine. 

Since a tailor can do more work by 
using a sewing-machine than he can by 
hand, rather than do without the ma¬ 
chine which he may be unable to pur¬ 
chase he will gladly give a portion of 
the increased production for the hire of 
such a machine. This is altogether 
true, but what does it prove? It cer¬ 
tainly proves nothing in regard to capi¬ 
tal-profit. The same argument might 
be offered to demonstrate that all drink- 


INVOLUNTARY IDLENESS. 79 

ing-water must have a price because 
any man famishing from thirst would 
willingly pay a high price for a drink. 
Returning to our illustration, let it be 
assumed at first that only one man can 
make sewing-machines, he being the 
patentee. The tailors will no doubt 
offer as a hire a part of their extra 
earnings, and the supply of machines 
being inadequate, those wanting ma¬ 
chines, in competing against each other, 
will offer almost the entire advantage 
gained by the use of the machines. 
We must of course take into consider¬ 
ation that the aversion of tradesmen to 
change their wonted method of working 
and other elements reduce the estimated 
advantages below the actual increase 
of production. With this qualification 
it can be said that there exists an eco- 



80 INVOLUNTARY IDLENESS. 

nomic tendency to give to the sole 
maker of the machines approximately 
the entire advantage gained by the use 
of the machines. 

But after the patent expires and others 
can make sewing-machines, their supply 
will rapidly increase because they will 
be a profitable investment. Then the 
owners of the machines will compete, 
and the rate of hire will fall, involving 
a cheapening of the produce of the 
sewing-machine, the consumers of which 
will reap that part of the benefit result¬ 
ing from the invention which ceases to 
be returned to the owners of the ma¬ 
chines. The question is now as to how 
far competition will tend to depress the 
hire. Why is it that the law of supply 
and demand assigns only a portion of 
the benefit of the invention, after it has 


IN VOL UNTAR Y IDLENESS. 81 

become public property, to the consumer 
of that which has been produced on the 
machine? Why is it that a portion of 
that which had formed the remuneration 
of the inventor goes to the owner of the 
machine in which that invention is in¬ 
corporated? The inventor as such cer¬ 
tainly ceases to reap any specific benefit 
from the time the invention becomes 
virtually public property. The answer 
to these questions must furnish the real 
clue to capital-profit, if it is attributable 
to the benefit afforded by the use of 
capital. The hire being now less than 
the advantage due to the use of the ma¬ 
chine, this advantage ceases to determine 
the hire, and we must look for some 
other economic factor fixing this rate. 
Capital will no doubt continue to be in¬ 
vested in the making of sewing-machines 



82 IN VOL UNTAR Y IDLENESS. 

as long as the profit resulting from this 
investment exceeds that which can be 
obtained from other investments, and the 
hire will fall as more capital is invested 
in this branch. Were other forms of 
capital incapable of returning a profit, 
the investments in sewing-machines would 
increase until the profit accruing after 
deducting risk and deterioration would 
be only nominal, or practically nil. But 
other forms of capital being known to 
bring a revenue, investors will be at¬ 
tracted only so long as the hire of sewing- 
machines will bring a profit over and 
above that of other investments. We 
are thus led to the inference that capital 
in the form of sewing-machines can per¬ 
sistently bring interest only because other 
forms of capital are capable of bringing 
interest. The sewing-machine as such 


INVOL UNTAR Y IDLENESS. 33 

can therefore not account for profit on 
capital; the cause of interest must be 
looked for elsewhere, and since the same 
can be said of all other means of pro¬ 
duction, we are again compelled to fall 
back upon the interest-bearing power of 
money as the cause of all capital-profit, 
money being the only form of wealth to 
which an economic cause for interest can 
be assigned, while laws are in operation 
which by obstructing commerce render pos¬ 
sible the collection of a toll from the toilers. 

Doubting that the use of inanimate 
products can account for the apparent 
reproductive power of capital, some 
writers resort to a modification of the 
utility argument, which may be pre¬ 
sented by quoting Jeremy Bentham’s 
criticism of Aristotle, who held that all 
money is in its nature barren . “ A con- 


84 INVOL UNTAR Y IDLENESS. 

sideration that did not happen to pre¬ 
sent itself to that great philosopher, but 
which, had it happened to present itself, 
might not have been altogether unworthy 
of his notice, is, that though a daric 
would not beget another daric, any more 
than it would a ram, or a ewe, yet for 
a daric which a man borrowed he might 
get a ram and a couple of ewes, and that 
the ewes, were the ram left with them 
a certain time, would probably not be 
barren. That then, at the end of the 
year, he would find himself master of 
his three sheep, together with two, if not 
three, lambs; and that, if he sold his 
sheep again to pay back his daric, and 
gave one of the lambs for the use of it 
in the mean time, he would be two lambs, 
or at least one lamb, richer than if he 
had made no such bargain.” 


INVOL UNTAR Y IDLENESS. 35 

In this illustration we are told of two 
persons, one having sheep, which have 
the power of multiplying and are there¬ 
fore supposed to be capable of spon¬ 
taneously reproducing value, the other 
having money, which is acknowleged to 
be barren; yet one is willing to give his 
reproductive capital for money which is 
minus this desirable attribute. To say 
that with the daric the seller of the 
sheep might buy other sheep, or wheat, 
or wine, would be arguing in a circle. 
Viewing the transaction in the light in 
which its presentation is intended, it is 
evident that some one will be deprived 
of that benefit which the buyer of the 
sheep can reap; for the darics will 
continue to exist as darics and are not 
converted into anything else, and those 
who unwisely sold their automatic value- 


80 INVOL UN JAR Y IDLENESS. 

producers are just minus the three lambs 
as a result of their exchanges. There 
must be some flaw in this argument, for 
the sellers of sheep are as a rule as 
shrewd as the buyers. It appears that 
a consideration did not happen to present 
itself to the critic of the Greek philoso¬ 
pher, but which, had it happened to 
present itself, might have deterred him 
from antagonizing Aristotle. The hous¬ 
ing, feeding, and raising of the sheep 
and lambs require labor, without which 
the owner of the sheep would not have 
been the owner of the lambs. Leaving 
out of account the conditions which give 
rise to rent, as well as the effects of vari¬ 
ous restrictions to competition, the value 
of that labor and the value of the three 
lambs would be identical. The value 
of the lambs, then, must be attributed 


INVOLUNTARY IDLENESS. 


87 


to the labor spent, and not to the re¬ 
productive power of the sheep; hence 
the logic of Bentham falls to the 
ground. 

It is remarkable that this very argu¬ 
ment has been revived by Henry George, 
who has more than any one else con¬ 
tributed towards popularizing the doc¬ 
trine that the forces of nature cannot 
produce value independent of the quan¬ 
tity of labor applied, unless the supply 
is inadequate; and the margin of culti¬ 
vation being the limit that separates an 
insufficient from a redundant supply, it 
manifestly marks the line at which the 
bounty of nature ceases to have an ex¬ 
change value. Presuming freedom of 
competition, the reproductive powers of 
nature at the margin can accordingly pro¬ 
duce no value beyond that of the labor 


88 


INVOLUNTARY IDLENESS. 


requisite to aid nature in its processes 
and to appropriate its gifts. 

But even admitting, for the sake of 
argument, that interest could arise from 
the creative forces of nature, it remains 
a mystery as to how this power is im¬ 
parted to money when loaned. The 
allegation is that its exchangeability with 
vital products accomplishes this transfer. 
This, however, is not a valid reason. 
Exchanges are consummated on account 
of the properties possessed by the objects 
of exchange; but here we are informed 
that a thing can be invested with a 
property it does not originally possess 
by the mere fact of being exchanged for 
a thing which has that property. This 
. is clearly one of the many instances in 
which cause and effect are confounded. 

Were it true that vital products are 


INVOLUNTARY IDLENESS. 39 

capable of bringing interest while money 
as such is not, then vital products and 
money would be economically hetero¬ 
geneous and hence non-interchangeable. 

Regarding the abstinence doctrine, 
its repeated condemnation and revival 
in modified forms alone is sufficient to 
betray its weakness. Its modern pres¬ 
entation generally takes the form of 
the assertion that immediate payments 
are preferred to promises of future pay - 
ments . But we cannot be unmindful 
of the fact that Safe Deposit Companies 
are even paid for delivering at a future 
time valuables received at present. This 
shows that those who accumulate wealth 
for a future use will prefer a future de¬ 
livery if it saves the trouble and risk 
that accompanies the conservation of 
wealth; provided the factor of risk is 


8 * 


90 INVOL UNTAR Y IDLENESS. 

absent, and the wealth receivable is not 
available for profitable investment. The 
possibility of a profitable investment of 
capital is therefore one of the conditions 
under which this argument is applicable, 
and for this reason abstinence cannot 
account for interest. In the sense in 
which it is used by the followers of 
Senior, abstinence is a voluntary delay of 
consumption, nothing more; and since 
no one can deny that the utility of ab¬ 
stinence consists in the ability to consume 
at a later day that which is not con¬ 
sumed to-day, its natural pay cannot 
exceed the value of the wealth con¬ 
served. The “Element of Time” is 
frequently mentioned as a factor in the 
law of distribution, but its exact bearing 
on the genesis of interest is never made 
quite clear. If time has any economic 


INVOL UNTAR Y IDLENESS. 91 

effect upon wealtli, it is generally one 
of deterioration, involving a loss of 
value, the exceptions being rare. 

Other arguments are equally doubtful. 
The assertion that man would not save 
capital if he could not make it a source 
of income is an insult to the intelligence 
of man. While it is true that he will 
not loan his wealth to any one without 
interest when he can get interest for the 
same loan from others, his propensity 
to accumulate will continue even after 
all but the natural motives for saving 
are removed. Man is certainly not in¬ 
ferior to the bee or the badger. That 
he will provide for the contingencies 
of the uncertain future even at the risk 
of loss and deterioration is indisputable. 

The expectation to meet, or the fear 
of, a future want is, however, not the 


92 INVOL UNTAR Y IDLENESS. 

only inducement; there exists another 
most potent motive for producing capital. 
Experience has taught that the indirect 
way of production which brings into 
requisition auxiliaries of a more or less 
intricate character is the most fertile 
and the least irksome method. The 
accumulation of capital is essential to 
the saving of labor, and our desire to 
gratify our wants with the least exertion 
prompts us to produce those auxiliaries 
which facilitate production, even if they 
should lack the power of returning a 
revenue. 

For this reason there is no foundation 
for the fear that progress will be im¬ 
peded when capital fails to bring a per¬ 
sistent income. Those producers who 
employ the most approved method of 
production will always have an advan- 


IN VOL UNTAR Y IDLENESS. 93 

tage over those who are slow to follow 
the march of improvement. But even 
the latter will in time follow in the foot¬ 
steps of their more enterprising competi¬ 
tors, when a cheapening of the product 
will transfer the benefit of progress to 
the consumers, while competition will 
render retrogression impossible. 

Equally groundless are the fears of 
those who imagine that capital will not 
be invested and industry will languish 
when capital ceases to return an interest 
exceeding its replacement. This pes¬ 
simism can be traced to a misconception 
of, and a failure to distinguish between, 
the functions of the capitalist and of 
the employer. The fact that they are 
usually centred in one person is no 
reason why they should not be separated 
in an analysis of their relation to pro- 


94 INVOLUNTARY IDLENESS. 

duction. The capitalist who as such is 
the owner of the capital and the recipi¬ 
ent of interest, is personally inert and 
is performing no part of the employer’s 
and manager’s work, who receives as 
remuneration for his services what is 
generally termed business profits, often 
affected more or less by occasional profits 
or losses due to speculation or to un¬ 
avoidable fluctuations of the market, 
etc. And as the remuneration of labor 
including the employers’, is increased 
by a diminution of interest, other things 
being equal, the inducement to work 
will really be increased and industry 
will be encouraged rather than other¬ 
wise. 

However we view this abstinence 
doctrine, when brought to its logical 
conclusion, it fails to show how under 


INVOL UNTAR Y IDLENESS. 95 

free competition in a community capa¬ 
ble of producing more than sufficient 
to satisfy the immediate needs, the dif¬ 
ference between the present and future 
valuation of wealth—which is claimed 
to determine the rate of interest—can 
in the average exceed the rate of risk 
and deterioration, and only in so far as 
these two elements are more or less pro¬ 
portionate to time, the “ Element of 
Time” can legitimately enter into the 
discussion in an indirect way. 

This concludes the chain of argu¬ 
ments which justify the assertion that 
involuntary idleness is due to a prevent¬ 
able cause. 

The law which denies the producing 
class the right to issue credit-money, 
however high their credit may be, oper¬ 
ates like the patent laws, which in for- 


96 INVOLUNTARY IDLENESS. 

bidding to others the use of an improve¬ 
ment justly enables the inventor to 
reap a part of the advantage which his 
invention affords; with this difference, 
that the free use of the invention of 
credit-money is withheld from the 
wealth-producers for the benefit of the 
lenders of money regardless of the 
time which lias elapsed since the inven¬ 
tion should have become public property. 
It makes that usury an economic pos¬ 
sibility which Bacon says “bringeth 
the treasure of a realm into few hands.” 
By enabling the owners of money who 
lend it on interest to acquire a right to 
demand an annual tribute from others, 
it gives to money directly, and to capi¬ 
tal indirectly, a seeming power of re¬ 
production and endows the dollar with 
the appropriate attribute “Almighty.” 


INVOLUNTARY IDLENESS. 


97 

Although Aristotle oyer two thousand 
years ago recognized the interest-bearing 
power of money to be unnatural, yet at 
the close of the nineteenth century, in 
which the impossibility of a reproduc¬ 
tion of physical energy has been de¬ 
monstrated, the doctrine that industrial 
energy in the form of capital is an ex¬ 
ception to the otherwise inexorable law 
of nature still dominates and prevents 
economic science from rising above the 
level of the ancient dogmas that physical 
science has long since discarded. The 
foremost writers commit themselves to 
obvious inconsistencies in the vain at¬ 
tempt to give a cogent explanation of the 
origin of this power. John Stuart Mill, 
in commenting on the expectations of 
those who advocate an expansion of 
credit-money, closes with the remark, 


98 1NV0L UNTAR Y IDLENESS. 

“The philosopher’s stone could not be 
expected to do more,” unmindful of 
the fact that, under the conditions which 
he defends, capital, if owned in sufficient 
quantity, can bring its owner enough 
of this world’s good to abundantly sat¬ 
isfy the irrational longing of the alche¬ 
mist. Bishop Berkeley frankly admitted 
that a bank is a gold-mine, and asks if 
it is not the real philosopher’s stone; 
but he failed to see that this magic 
power can be but the result of political 
legerdemain. 

This same power of money readily 
accounts for the absence of the equation 
which naturally should exist between 
the supply of and the demand for com¬ 
modities. The medium of exchange 
being available as a medium of extortion, 
is desired, not only for obtaining com - 


INVOLUNTARY IDLENESS. 99 

modities in exchange , but also for im¬ 
posing tribute . Money being for this 
reason more desirable than commodities 
of equal value, the demand for money 
will necessarily exceed the supply, and 
reciprocally, the supply of commodities 
offered for money must exceed the de¬ 
mand . The consequent accumulation of 
unsold products is often mistaken for the 
cause of involuntary idleness, while it is 
but a symptom of commercial stagnation. 
The amount of work that can be done 
under the modern system of divided 
labor is limited, depending upon the 
amount of products that can be ex¬ 
changed through the available facilities 
for exchange, and only a lack of such 
facilities can account for a scarcity of 
w r ork in a country so blessed by nature 
as this. The same fear of a dearth of 



100 INVOL UNTAR Y IDLENESS. 


employment that instigated the silk 
weavers to destroy the Jacquard loom 
now prompts legislators to “ protect” the 
workers by taxing imj)orts, regulating 
immigration, passing factory laws, and 
other similar ineffective enactments. It 
cannot be denied that while the debtors’ 
tribute exceeds the risk-premium, an 
increase of indebtedness by what is 
called an unfavorable balance of trade 
will impair the prosperity of a people; 
nor can it be gainsaid that the immigra¬ 
tion of producers, in absorbing a portion 
of the available medium of exchange 
and intensifying its comparative strin¬ 
gency, can only aggravate the stagnation 
of commerce; but these conditions being 
the effect of an obstruction to exchanges, 
additional restrictions cannot give relief. 

Our investigation has led to revela- 


IN VOL UNTAR Y IDLENESS. 101 

tions which constitute a serious arraign¬ 
ment of our present political institutions. 
There are laws supposed to protect the 
toiler in the enjoyment of the fruits of 
his labor which uphold a system of ex¬ 
ploitation under the guise of justice. 
The accusation is too serious to be met 
by mere denial or by the recapitulation 
of untenable doctrines and indefinite 
statements. 

We need look no further to account 
for the unrest of the producing class who 
plainly feel an oppression, the exact 
nature of which they fail to recognize, 
and who attempt to meet the unfavorable 
condition by combinations and restric¬ 
tions wholly opposed to the freedom and 
independence of intelligent men. While 
social science defends the power which 
secures incomes to the possessors of 


102 INVOL UNTAR Y IDLENESS. 


wealth altogether disproportioned to their 
personal merit, its teachings cannot cope 
with the plausible arguments of dema¬ 
gogues, nor check the unwise agitation 
of well-meaning men who advocate 
everything but the removal of inequi¬ 
table restrictions as a cure. Nor can it 
dispel the darkening cloud that over¬ 
shadows a civilization characterized by 
an increasing differentiation of rich and 
poor, by a periodical recurrence of busi¬ 
ness depressions and a growing discon¬ 
tent of the working classes, manifested in 
the hostile attitude of labor-organizations. 
If our financial legislation is really the 
seat of the disorder, the question of 
securing remunerative employment to all 
who are able and willing to work should 
no longer be considered an unsolvable 
problem. 


APPENDIX. 


As regards purely economic research, 
the study of the monetary flow between 
the creditor and the debtor class in con¬ 
junction with the amount of indebted¬ 
ness leads to an important discovery. 
It reveals the law which under present 
conditions determines the rate of inter¬ 
est proper. Though somewhat abstract, 
the following deduction of this law may 
be of interest. 

In principle the separation of the 
financial from the industrial group can 
be conceived with perfect precision, if 
it is based upon functional relations 
and not upon the individuality of per- 


103 



104 


APPENDIX. 


sons. In tracing the monetary flow at¬ 
tention must be paid to money rather 
than to its owners, by classifying the 
various purposes for which it is used. 
The financial group being considered 
the source of all money, each piece 
passes from it into circulation when 
used for the first time, and in its fur¬ 
ther career it may alternately pass from 
group to group, communication being 
established by several channels through 
which it will pass when employed 
in certain transactions. All money 
can thus be separated into two dis¬ 
tinct volumes, one being dormant in 
the possession of the financial, the 
other circulating within the industrial, 
group. 

Regarding the relation of indebted¬ 
ness , those persons interested in both 


APPENDIX. 


105 


groups have from the stand-point of 
our present inquiry a dual existence, 
their relations to each group constituting 
them or making them distinct individu¬ 
alities, to differentiate which it is neces¬ 
sary to agree as to what establishes a 
financial relation. Accepting as finan¬ 
cial obligations all interest-bearing debts 
which by stipulation are payable in 
money, all persons having such claims 
are to that extent members of the finan¬ 
cial or creditor group, while in every 
other capacity they with all others are 
members of the industrial or debtor 
group* 

In deducing the law of interest we 
must obviously take cognizance of all 
transactions by which money will pass 
from one group to the other, as well 
as those affecting the relation of in- 


106 APPENDIX. 

debtedness, while all transactions which 
affect neither the relative indebtedness 
nor the volume of money in circulation, 
are of a neutral character and are here 
of no consequence. 

As we have seen, money can be put 
into circulation only by purchases and 
by loans, and is restored to the financial 
class by the payment of the principal 
of, and interest on, loans. Purchases 
imply a flow of money from the finan¬ 
cial to the industrial group only if the 
money paid emanates from the financial 
group, while those made with money 
already in circulation must be treated 
as monetary transfers within the indus¬ 
trial group and have no effect upon the 
flow under examination. All invest¬ 
ments in stock, business ventures, etc., 
should be included in the category of 


APPENDIX. 


107 


purchases, and the payment of dividends, 
shares of profits, etc., are neutral trans¬ 
actions. A flow of money in the oppo¬ 
site direction through commerce is pre¬ 
cluded, because the selling of goods or 
services is exclusively a function of the 
industrial group. The officers of a 
bank, in selling their services to the 
bank, are clearly members of the in¬ 
dustrial group, they are workmen en¬ 
gaged in directing the flow of money 
into the most remunerative industrial 
channels and guarding the security of 
financial transactions. 

Lending money is eminently a func¬ 
tion of the financial group, and every 
flow through the loan channel marks 
an increase of indebtedness. But when 
money circulating within the industrial 
group is used for loans, a difficulty 


108 


APPENDIX. 


would arise if the recognition of the 
economic duality of the owner did not 
enable us to regard the intent to use 
such money for a loan, as its conveyance 
from one to the other of the dissociated 
units of the owner, as a transfer from 
the industrial to the financial, from 
which it is returned as a loan to the 
industrial group. 

Sales of commodities on credit, if 
such debts are interest-bearing, should 
likewise be considered compound-trans¬ 
actions,—one a complete sale, the other 
a return of the purchase-money as a 
loan. 

Indebtedness can be terminated either 
by payment of principal and interest, 
or by remission, when obligations cannot 
be met. The risk of losses would not 
be incurred if the interest paid by the 


APPENDIX. 1Q9 

debtors as a whole did not more than 
cover such losses, so much of the interest 
as will equal them being the insurance. 
The monetary flow resulting from the 
payment of interest is accordingly di¬ 
vided into two branches, the risk-pre¬ 
mium, and the interest-proper, the for¬ 
mer being equal to the sum total of all 
relinquished loans. 

We now clearly recognize five chan¬ 
nels of the monetary flow as repre¬ 
sented in Fig. 3. (See plate at end 
of volume.) By purchases and loans 
money will flow from the financial to 
the industrial group, and by Transfers, 
Cancellations, and Interest in the oppo¬ 
site direction, the interest channel con¬ 
sisting of two branches, Risk-premium 
and Interest-proper . 

All possible financial transactions 


10 


110 APPENDIX. 

can be resolved into these fundamental 
currents. Seemingly exceptional cases 
will be found, upon proper considera¬ 
tion, not to conflict with this statement. 
The payment of debts by check or draft 
might appear to constitute an exception, 
being a cancellation of debts appar¬ 
ently without a transmission of money, 
but such payment is to all intents 
and purposes cash payment, money 
being virtually handed by the payor 
to the payee, and thus passed from 
the industrial to the financial group 
while lying in bank. Money received 
in payment of debts manifestly cannot 
be applied to the cancellation of other 
debts before it is returned to the in¬ 
dustrial group, because a member of 
the financial group cannot as such be 
a debtor. His economic duality, how- 


APPENDIX. HI 

ever, allows this transfer to be made 
to himself, as it were, in the nature 
of a business investment, and as such 
the money passes through the purchase- 
channel, to which all investments have 
been assigned. 

Denoting the currents of money 
shown in the diagram by the letters 
P, T, L, C, R, and I, the total in¬ 
debtedness by D, and the volume of 
money circulating within the indus¬ 
trial group by Y, the following rela¬ 
tions, expressible by equations, are self- 
evident. 

Always referring to a definite period, 
the volume Y is increased only by the 
currents P and L, and is reduced by the 
reverse currents T, C, R, and I; hence 
the change of volume is represented 
by the equation: 


112 


APPENDIX. 


(1) JY=P+L— (T + C + R + I). 

(The letter A designating “ difference” 
or “ change.”) 

The financial obligations are increased 
by loans, and reduced by their payment 
and by the remission of bad debts, the 
latter being equal to the insurance R. 
The change of indebtedness is therefore 
expressed by the equation: 

(2) AT> = h — (C + R). 

From formula (1) it is found that: 
I = P — T — JY-f-L — (C-fR), 

and by substituting the value Aj) for the 
last portion of this equation, as per 
equation (2), 

(3) I — P — T-f-JD — J Y. 

This is the total amount of interest 
paid by the debtor class, and to obtain the 


APPENDIX. 


113 


annual rate per cent, this quantity should 
be multiplied by 100 and divided by 
the average indebtedness for which this 
interest is paid and by the duration of 
the period considered, expressed in terms 
of a year. 

It will be observed that for this rea¬ 
son the sum total of interest, I, is not in 
any sense an indication of the rate of in¬ 
terest, since the variable total indebted¬ 
ness appears as a quotient of the rate. 
Even though as a rule a change in the 
one will also indicate a similar change 
in the other, it does not follow that 
their fluctuations must necessarily corre¬ 
spond. 

Further considerations will reveal the 
full import of the above law of interest. 

The first two terms of formula (3) 
are invariably positive, while the last 


10* 


114 


APPENDIX. 


two are sometimes positive, sometimes 
negative, according as the increasing 
or the reducing currents preponderate. 
In viewing a long period they will be 
insignificant compared with the first 
two, and may % be neglected, whereby 
the formula (3) is reduced to: 

(4 ) I = P — T. 

In this form the equation clearly in¬ 
dicates that the rate of interest will 
rise as the money of the financial class 
is more freely used for purchases and 
business investments, and will fall as 
more of the money in circulation is ap¬ 
plied to money-loans, the difference of 
these two items being the amount which 
the debtor class is able, in the long run, 
to devote to the payment of interest 
proper. 


APPENDIX. 


115 


Iii considering shorter periods, the 
terms AD and A\, which have been 
neglected, must be recognized. They 
will be found to bear a well-defined 
relation to the cycle of fluctuating in¬ 
dustrial activity. In jliis cycle four 
periods may be distinguished, according 
as the departure of interest from the 
amount indicated in formula (4) is at¬ 
tended more prominently by a departure 
from zero of the one or the other of the 
two differentials. 

The first period is characterized by 
an excess of interest, accompanied by 
an increase of indebtedness, AD — ^V 
being positive on account of a predomi¬ 
nating positive, aD. In the second 
period interest is likewise above the rate 
given by formula (4), but is accompa¬ 
nied by a diminution of the volume of 


116 


APPENDIX. 


money in circulation and its accumu¬ 
lation in the hands of the financial 
class, AT) — AY being positive because 
the subtrahend is negative. The 

third period is marked by a deficiency 
of interest, accompanied by a diminu¬ 
tion of indebtedness, A D — AY being 
negative owing to a negative ^D, and 
during the fourth period interest is 
still deficient and accompanied by an 
increase of the volume of money in 
circulation, Aj) — A Y being negative 
because of the predominance of a posi¬ 
tive jV. 

Only in rare cases is the transition 
from one into the other of these periods 
of an abrupt nature; the process is 
generally attended by a gradual change 
of conditions. When after a depression 
business begins to recover and capital 


APPENDIX. 


117 


is more freely invested, the demand 
for money-loans will increase and in¬ 
terest will rise. The flow L will be 
copious and the total indebtedness will 
increase, making AD positive. This 
condition may last for years; but the 
ability of the debtors to furnish ade¬ 
quate security being limited, new loans 
cannot always keep up the supply of 
money requisite to pay the interest 
which must ultimately be paid at the 
expense of the money in circulation. 
The positive aD will be replaced by 
a negative jV, marking the advent 
of the second period, during which 
money will accumulate in banks. By 
the consequent scarcity of money com¬ 
merce will be impeded, business de¬ 
pressed, and investments will no longer 
be profitable. 


118 


APPENDIX. 


The debtors being unable to meet 
their obligations for want of money, 
frequent bankruptcies will occur. This 
not only reduces the total indebted¬ 
ness D, but also the interest proper, 
since now a greater proportion of the 
gross interest is required than formerly 
to balance the losses. Both a negative 
aT> and low interest proper are thus 
traceable to the same cause. Interest 
will be low even though money is 
scarce, and the law of interest illus¬ 
trated in the diagram, Fig. 2 (see 
plate at end of volume), is suspended. 
During this anomalous condition both 
wages and interest are low because of 
the industrial stagnation and dearth of 
employment which will follow and en¬ 
dure until the excess of the flow P 
above the return flow (I + R) increases 


APPENDIX. 


119 


the volume V sufficiently to promote 
commercial activity, when a revival of 
business will follow. The law expressed 
in formula (3) is thus fully in accord 
with the features actually observed in 
the periodical fluctuations of business. 












♦ 







































































































































. 





















































































PRODUCTIVITY, 


Fig. 1. 




Fig. 3. 

THE MONETARY CIRCULATION. 























































































































































* 



































































































































































































































































































































































































































































1 














































































